JLARC Preliminary Report: 2016 Tax Preference Performance Reviews

The Legislature established this preference to promote the economic development of Washington’s aerospace cluster and increase tax revenues by promoting a competitive marketplace for storing and modifying unfurnished, noncommercial aircraft.

Nonresidents do not pay sales or use tax on their purchases in Washington of:

1. Large, private airplanes; and
2. Labor and services performed in Washington to repair, clean, alter, or improve large, private airplanes they own.

The sales and use tax exemption applies only when the large private airplane is not required by law to be registered with or file annual renewals with the Aviation Division of the Washington State Department of Transportation (WSDOT Aviation).  See the Legal History tab for additional detail.

The preference took effect on January 1, 2014, and is scheduled to expire July 1, 2021.

A “large, private airplane”:

• Is not used in interstate commerce;
• Is not owned or leased by a government entity;
• Weighs more than 41,000 pounds (generally Boeing 737s and above); and
• Is assigned a category A, B, C, or D aircraft weight class by the Federal Aviation Administration.

2013

The Legislature enacted this preference.  The bill included an intent section stating that the public policy objective was to promote economic development of the state’s aerospace cluster and increase state tax revenues by promoting a competitive marketplace for storing and modifying unfurnished, noncommercial aircraft.

This tax preference was part of a bill passed during the second special session, intended to modify Washington’s tax policy in several ways to encourage additional growth of the aerospace cluster in the state. 

In addition to this preference, the 2013 bill also had the following effects, which are not part of this review.

Industry representatives testified and provided information to the Legislature claiming the changes created in the bill would create 1,195 jobs, each with wages and benefits of $70,000-$80,000 per year, add B&O tax revenue, and grow the aerospace industry in Washington by making Washington’s tax structure “more competitive.”

The preference took effect January 1, 2014, and is scheduled to expire July 1, 2021.

During the 2013 third special session, the Legislature extended the expiration date and preferential tax treatment provided on a different package of aerospace tax preferences.  JLARC staff reviewed this package of aerospace tax preferences in 2014.

What are the public policy objectives that provide a justification for the tax preference? Is there any documentation on the purpose or intent of the tax preference?

In the intent section for the preference, the Legislature stated its objective was to promote economic development. The bill also directed JLARC staff to measure the net impact of the preference on state tax revenues.

Promote Economic Development

The Legislature stated the public policy objective for this preference was to:

. . . promote the economic development of our state's aerospace cluster and increase the tax revenues collected by the state through promoting a competitive marketplace for storing and modifying unfurnished, noncommercial aircraft.

The Legislature noted that Washington was losing jobs in this industry to other states, resulting in the loss of high-wage jobs and new tax revenue.  The bill also stated that Washington tax statutes were an impediment to encouraging development of aerospace clusters in the state.  The Legislature concluded it intended to modify Washington’s tax policy to encourage aerospace cluster development within the state and increase tax revenues.

Measure Net Impact of the Tax Preference

The Legislature directed JLARC staff to:

• Estimate the net impact of the preference on state tax revenues by comparing the decrease in state revenues resulting from the changes made in the bill with the additional tax revenues generated from the direct, indirect, and induced economic impacts from the changes.
• Estimate, to the extent practicable, job growth in the aerospace cluster resulting from the tax preference(s) changes.

What evidence exists to show that the tax preference has contributed to the achievement of any of these public policy objectives?

The tax preference is not achieving its objective of promoting economic development.  As of March 2016, no one is using it.  The net impact of the preference is zero.

Promote Economic Development

As of March 2016, there is no evidence of qualifying sales of large, private airplane to nonresidents or of qualifying modification work on such airplanes.

JLARC staff worked with the Department of Revenue (DOR) to identify any evidence of use of the preference.  These efforts included:

• Contacting the businesses that had expressed interest during the 2013 legislative session in performing this work.  The businesses reported no qualifying work.
• Analyzing tax return deduction detail to look for businesses selling or modifying large, private airplanes to or for nonresidents.  There were no qualifying sales.
• Reviewing businesses that had reported an amount on their tax return showing use of the preference.  This review showed that these businesses had reported incorrectly.
• Reviewing Buyer Addendum data.  There were no qualifying purchases, and some businesses incorrectly reported making such purchases.
• Contacting the Aerospace Futures Alliance, the lobbying organization that had promoted the legislation in 2013.  JLARC staff asked whether the preference had stimulated the predicted activity.  As of May 2016, JLARC staff had received no response from the industry.
• Contacting WSDOT Aviation to determine if any nonresident owners of large, private airplanes had filed documentation indicating the aircraft was exempt from registration. As of April 2016, WSDOT Aviation had received no registration exemptions.

Measure Net Impact of the Preference on State Tax Revenues

As of March 2016, there is no evidence that the preference has stimulated any of the anticipated economic activity.  The net impact is zero.

To what extent will continuation of the tax preference contribute to these public policy objectives?

The preference is not being used at this time. Continuing the preference will not contribute to the public policy objectives if it is not used.

Who are the entities whose state tax liabilities are directly affected by the tax preference?

The available evidence shows no direct or indirect beneficiaries.

As required in statute, the Department of Revenue added a specific reporting line for businesses selling large, private airplanes or repairing or modifying them to report their business income from such activities.

In examining tax return data, JLARC staff found reporting problems, which were confirmed by subsequent Department of Revenue examination and outreach.  The businesses that had reported amounts on the line established for this preference had incorrectly reported.

What are the past and future tax revenue and economic impacts of the tax preference to the taxpayer and to the government if it is continued?

There are no direct beneficiary savings for this tax preference.  Available evidence indicates that, as of March 2016, there have been no qualifying sales or services taking place in Washington.

If the tax preference were to be terminated, what would be the negative effects on the taxpayers who currently benefit from the tax preference and the extent to which the resulting higher taxes would have an effect on employment and the economy?

There would be no negative effects if the preference were terminated, since the available evidence indicates it has not been used.

Do other states have a similar tax preference and what potential public policy benefits might be gained by incorporating a corresponding provision in Washington?

When the Legislature considered this preference in 2013, industry representatives stated customers wanting private airplane modifications were inclined to go to other states that offered “more favorable tax exemption codes.” They noted the preference would provide a “level playing field” with other states.

JLARC staff examined states specifically identified in testimony as competitors for large, private airplane sales and modifications.  All of these states provide a sales tax exemption for large airplanes purchased by nonresidents, although several states require the airplane to leave the state within a set timeframe after purchase.  Kansas and Texas were specifically mentioned as being competitive for airplane modification work.

Intent Statement

ESSB 5882 (2013)

Sec. 1101. (1) The legislature intends to promote the economic development of our state’s aerospace cluster and increase the tax revenues collected by the state through promoting a competitive marketplace for storing and modifying unfurnished, noncommercial aircraft.  The legislature finds that Washington is currently losing these types of jobs to other states, resulting in the loss of high-wage jobs and new tax revenue.  Further, the legislature finds that the current tax statutes are an impediment to encouraging the development of aerospace clusters in our state.  Therefore, the legislature intends to modify our state’s tax policy to encourage aerospace cluster development within the state and increase tax revenues

(2) The joint legislative audit and review committed, as part of its tax preference review process, must estimate the net impact on state tax revenues by comparing the decrease in state revenues resulting from the changes made in part XI of this act to the additional tax revenues generated from the direct, indirect, and induced economic impacts from those changes.  The committee must also, to the extent practicable, estimate job growth in the aerospace cluster resulting from the changes made in part XI of this act.  The committee must conduct its tax preference review of part XI of this act during calendar year 2016 and report its findings and recommendations to the legislature by January 1, 2017.

RCW 82.08.215

Exemptions—Large private airplanes.  (Expires July 1, 2021.)

(1)(a) The tax levied by RCW 82.08.020 does not apply to:

(i) Sales of large private airplanes to nonresidents of this state; and

(ii) Sales of or charges made for labor and services rendered in respect to repairing, cleaning, altering, or improving large private airplanes owned by nonresidents of this state.

(b) The exemption provided by this section applies only when the large private airplane is not required to be registered with the department of transportation, or its successor, under chapter 47.68 RCW.  The airplane owner or lessee claiming an exemption under this section must provide the department, upon request, a copy of the written statement required under RCW 47.68.250(5)(c)(ii) documenting the airplane's registration exemption and any additional information the department may require.

(2) Sellers making tax-exempt sales under this section must obtain an exemption certificate from the buyer in a form and manner prescribed by the department.  The seller must retain a copy of the exemption certificate for the seller's files.  In lieu of an exemption certificate, a seller may capture the relevant data elements as allowed under the streamlined sales and use tax agreement.  For sellers who electronically file their taxes, the department must provide a separate tax reporting line for exemption amounts claimed under this section.

(3) Upon request, the department of transportation must provide to the department of revenue information needed by the department of revenue to verify eligibility under this section.

(4) For purposes of this section "large private airplane" means an airplane not used in interstate commerce, not owned or leased by a government entity, weighing more than forty-one thousand pounds, and assigned a category A, B, C, or D test flow management system aircraft weight class by the federal aviation administration's office of aviation policy and plans.

[2013 2nd sp.s. c 13 § 1103.]

RCW 82.12.215

Exemptions—Large private airplanes.  (Expires July 1, 2021.)

(1)(a) The tax levied by RCW 82.12.020 does not apply to the use of:

(i) Large private airplanes owned by nonresidents of this state; and

(ii) Labor and services rendered in respect to repairing, cleaning, altering, or improving large private airplanes owned by nonresidents of this state.

(b) The exemption provided by this section applies only when the large private airplane is not required to be registered with the department of transportation, or its successor, under chapter 47.68 RCW.  The airplane owner or lessee claiming an exemption under this section must provide the department, upon request, a copy of the written statement required under RCW 47.68.250(5)(c)(ii) documenting the airplane's registration exemption and any additional information the department may require.

(2) Upon request, the department of transportation must provide to the department of revenue information needed by the department of revenue to verify eligibility under this section.

(3) For purposes of this section, the conditions, limitation, and definitions in RCW 82.08.215 apply to this section.

[2013 2nd sp.s. c 13 § 1104.]

Legislative Auditor Recommendation

The Legislature should allow this preference to expire if it still is not achieving the stated public policy objectives by the scheduled July 1, 2021, expiration date.

The available evidence indicates that, as of March 2016, the preference has not been used since enacted.  JLARC staff will monitor this preference to see if any qualifying activity takes place and if so, may recommend that it be evaluated again before it expires.  The preference may be a candidate to include as part of JLARC staff’s legislatively required review of aerospace industry tax preferences in 2019.

Legislation Required: No.

Fiscal Impact: None known.

Available December 2016.

Available December 2016.

If applicable, will be available December 2016.